TornadoCash Founder Sentenced to 64 Months, Leaving Crypto Community Divided
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TornadoCash Founder Sentenced to 64 Months, Leaving Crypto Community Divided
Web3 technology being decentralized does not mean that developers and companies are also decentralized.
Navigating Web3 tides with focused insightsAuthor: Lawyer Liu Honglin, Shanghai Manqin Law Firm
In May 2024, Alexey Pertsev, one of the co-founders and core developers of Tornado Cash and a 31-year-old Russian citizen, was sentenced to five years and four months in prison in the Netherlands for laundering $2.2 billion through the cryptocurrency mixing platform.
Previously, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) added Tornado Cash to its sanctions list, accusing it of aiding hackers and criminals in money laundering—including facilitating fund laundering activities by the North Korea-linked hacker group Lazarus Group. U.S. users were prohibited from accessing the platform, and U.S.-based blockchain companies and projects were barred from transacting or interacting with Tornado Cash. The U.S. Department of Justice (DOJ) filed criminal charges against Tornado Cash founders Roman Storm and Roman Semenov, alleging conspiracy to commit money laundering, violation of sanctions regulations, and operating an unlicensed money transmitting business. Both individuals could face at least 20 years in prison. Storm was arrested last year and will stand trial in September this year, while Semenov remains at large. The outcome of Pertsev’s sentencing may significantly influence the future trials of these two Tornado Cash founders.
The Netherlands and the United States are not alone in their hostile stance toward Tornado Cash—regulatory crackdowns have occurred globally.
Germany: On August 20, 2022, Germany’s Federal Financial Supervisory Authority (BaFin) launched an investigation into Tornado Cash, determining that it failed to comply with anti-money laundering (AML) regulations. BaFin issued warnings and imposed fines accordingly.
France: On September 5, 2022, France’s National Commission on Informatics and Liberty (CNIL) reviewed Tornado Cash’s privacy policy, concluding it inadequately protected user privacy, and levied sanctions against the service.
Japan: On September 15, 2022, Japan’s Financial Services Agency (FSA) conducted a review of Tornado Cash, expressing concerns over its potential use in illicit activities. It issued a warning letter demanding improvements in AML measures.
South Korea: On October 1, 2022, South Korea’s Financial Services Commission (FSC) blacklisted Tornado Cash, banning citizens from using the service and launching an investigation into possible money laundering activities.
Canada: On October 20, 2022, Canada’s Financial Transactions and Reports Analysis Centre (FINTRAC) investigated Tornado Cash, highlighting its money laundering risks and recommending enhanced regulatory oversight.
Australia: On November 1, 2022, Australia’s Transaction Reports and Analysis Centre (AUSTRAC) began monitoring Tornado Cash, warning that it could be exploited by criminals for money laundering purposes.
Why has a single blockchain project been progressively banned across multiple countries? Is this the erosion of privacy or the downfall of technology? In this article, Manqin Law Firm’s lawyer Liu Honglin takes crypto enthusiasts on a digital surf through the storm.
What is the Tornado Cash Mixer?
Tornado Cash is a decentralized mixing service built on Ethereum that uses smart contracts to pool users’ deposits and redistribute them, thereby obscuring the origin of funds. Created on August 6, 2019, by developers Roman Semenov and Roman Storm, Tornado Cash aims to enhance transaction privacy on Ethereum, enabling users to “send Ethereum cryptocurrency 100% anonymously.” Core team members, including Alexey Pertsev, possess extensive expertise in privacy protection and decentralized technologies.
Since its launch, Tornado Cash has undergone continuous iterations and upgrades, releasing multiple versions supporting various cryptocurrencies. It has evolved into a well-known privacy tool within the crypto community. At its peak in July 2021, the Tornado Cash pool contracts held over $700 million worth of ETH.
In simple terms, Tornado Cash operates by blending numerous deposit and withdrawal actions together. After depositing tokens into Tornado Cash, users generate a zero-knowledge proof (ZK Proof) confirming their deposit, then withdraw funds using a new address—thereby severing the link between deposit and withdrawal addresses.
To make deposits and withdrawals appear uniform, each deposit and withdrawal amount in a given Tornado Cash pool is standardized. For example, if 100 users deposit and another 100 withdraw from a pool, each transaction involves the same amount, making it impossible to trace associations based on transaction size—thus breaking the trail of fund transfers.
Breaking down the process step-by-step:
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User deposits: Users send ether (ETH) to Tornado Cash’s smart contract and receive a secret note.
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Mixing process: The smart contract pools deposits from multiple users into a shared fund.
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Funds withdrawal: Users redeem funds using the note; the withdrawn funds are not directly linked to the original deposit address.
Tornado Cash functions like a piggy bank: ten people simultaneously deposit $100 and receive deposit vouchers, then later retrieve $100 each using those vouchers. Since cash itself isn’t registered to individuals, we cannot accurately determine who deposited and who withdrew. This very feature is precisely what makes Tornado Cash so challenging for governments and regulators worldwide.
Regulatory Crackdown: Heavy-Handed Enforcement
Of course, Tornado Cash is not the only mixer causing headaches for regulators—other similar services such as CoinJoin, mixing services, and Wasabi Wallet also draw scrutiny. As innovation surges in the crypto space, regulatory challenges continue to mount.
In 2024, the U.S. Senate passed an amendment to the Fiscal Year 2024 National Defense Authorization Act (FY24NDAA), with a total budget of $886 billion. One provision strengthens regulatory oversight of financial institutions involved in cryptocurrency transactions and targets crypto assets designed to "increase anonymity," particularly mixers. The amendment was jointly introduced by Senators Elizabeth Warren (Democrat) and Roger Marshall (Republican), both known critics of cryptocurrency. Bill Hughes, legal counsel at Web3 infrastructure developer ConsenSys, called it “one of the most significant congressional actions on crypto assets to date.”
Why are regulators so focused on mixers and cracking down persistently? Several key reasons:
Money laundering: Due to its anonymity, Tornado Cash has been widely used for money laundering. For instance, Dutch prosecutors allege that Alexey Pertsev, a developer behind the service, participated in laundering up to $1.2 billion. Prosecutors identified 36 suspicious transactions on Tornado Cash, including one involving 175 ETH believed to be linked to the Ronin Bridge hack. On March 23, 2022, the Axie Infinity Ronin sidechain bridge suffered a cyberattack resulting in approximately $625 million in losses—one of the largest crypto heists ever recorded. Criminals used Tornado Cash to launder the stolen funds.
Terrorist financing: The anonymity offered by Tornado Cash has also been exploited by terrorist organizations for covert fundraising. Law enforcement fears this enables terrorists to access funding undetected. For example, evidence emerged in 2021 suggesting certain terrorist groups had raised substantial funds via cryptocurrency mixing services.
Sanctions evasion: Certain nations or individuals use Tornado Cash to circumvent international sanctions by transferring funds anonymously via cryptocurrency. For example, North Korea’s Lazarus Group is accused of using Tornado Cash to move proceeds from cyberattacks, evading detection under global sanctions regimes.
Crypto Enthusiasts: Love and Loathing
In contrast to government agencies, many crypto users embrace mixers because they fulfill a strong demand for privacy and financial security.
Tornado Cash and similar mixers offer robust privacy protections. For high-net-worth individuals in the crypto space, using mixers helps avoid becoming targets of hacking or extortion due to publicly visible transaction histories. Additionally, activists and journalists operating under oppressive regimes rely on mixers to conceal the sources and uses of their funds from government or organizational surveillance. Consequently, when Tornado Cash developers faced prosecution, defense funds were established in their support, and prominent figures publicly backed them. Notably, former NSA whistleblower Edward Snowden endorsed the legal defense fund for Tornado Cash developers Roman Storm and Alexey Pertsev, which has since raised over $350,000.
However, as with all things, there are two sides—those seeking anonymity aren't always virtuous actors.
A classic scenario arises in cases of cryptocurrency theft. Often, clients reach out to Manqin Law after losing crypto assets. Upon conducting on-chain analysis, if we discover the thief used a mixer, our reaction is usually a resigned “game over.” Once stolen crypto passes through a mixer, tracing and recovering the assets becomes extremely difficult. In the Ronin Bridge hack, attackers laundered stolen funds through Tornado Cash, rendering fund tracking nearly impossible and leading to irrecoverable losses.
Beyond asset loss, from a legal compliance perspective, the biggest risk for mixer users lies in potentially violating anti-money laundering (AML) and counter-terrorism financing laws in certain jurisdictions. Given that mixers like Tornado Cash are under intense regulatory scrutiny, users risk having their funds frozen or inaccessible if the service is sanctioned or shut down. For example, OFAC’s sanctions left many Tornado Cash users unable to withdraw their funds, resulting in significant financial losses.
Therefore, individual users should thoroughly understand and comply with local laws before using any mixing service, avoiding legal exposure. It is advisable to carefully select reputable and secure mixing services and avoid those already sanctioned or controversial. Users should also refrain from concentrating all funds within a single mixing service. Diversifying across multiple channels can help mitigate risk. Any signs of trouble should prompt immediate action.
In April 2023, the U.S. Department of the Treasury released an assessment report on illicit financial activity in DeFi, highlighting potential risks and detailing how bad actors exploit these platforms for criminal purposes. Three months later, four U.S. senators proposed the “Cryptocurrency National Security Enhancement and Enforcement Act,” aimed at strengthening regulation of KYC, AML, and the DeFi sector.
The “Cryptocurrency National Security Enhancement and Enforcement Act” proposes a new framework for regulating DeFi, asserting that DeFi platforms should be regulated similarly to other crypto entities. It stipulates that any person capable of controlling a project must bear responsibility for it. If no identifiable individual controls a DeFi service, then any investor contributing more than $250,000 should assume liability for the platform.
For mixer developers, although decentralized technology services are technically neutral, both your company and you personally reside within a real-world jurisdiction. Therefore, prior to launching such services, ensure development and operations comply fully with applicable national and regional laws. Strengthen platform security to prevent hacking and theft, safeguard user funds, and avoid becoming a target of legal enforcement.
Manqin Legal Advisory
Tornado Cash has gained popularity among many cryptocurrency users due to its powerful anonymity and privacy features. Yet, ironically, this very anonymity has made it a prime target for law enforcement. At a time when aiding information network crime (helping information network criminal activity, or “Bangxin Crime”) has become one of China’s top three criminal offenses, both crypto users and tech developers must remain vigilant. While enjoying the benefits of technological innovation, adherence to laws and regulations is essential. In the dark forest of the crypto world, caution is never excessive.
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